US Markets Closing Comments - 27th Feb 2008

Economic Summary


Markets had to juggle weak economic data, another pledge from Fed Chairman
Bernanke to act in a "timely" manner, and news that FNMA and FHLMC's regulator
will remove the agencies' portfolio caps on March 1. In a volatile session,
stocks and Treasury coupon securities ended mixed with small changes. The
dollar hit a new record low against the euro and lost more ground versus the
yen.

New orders for durable goods fell 5.3% in January, following a 4.4% gain in
December (revised from +5.0%). The data were weaker than the consensus call of
-4.0%. Nondefense aircraft orders (-30.5%) were a significant negative
influence, as expected. Excluding transportation, orders were down 1.6%. A
positive aspect of the report was that January nondefense capital goods
shipments ex aircraft, which factor into the business spending component of
GDP, stood an annualized 5.1% above the Q4 average, little changed from the
Q4/Q3 growth rate of 5.0%. While this did not rule out a slowdown in business
spending growth in Q1, it did paint a less dire picture than some of the
regional manufacturing surveys have painted in the past couple of months.

New home sales fell by 2.8% in January to an annualized 588k, below the
consensus call of 600k. January's was the lowest level of sales since February
1995. Net revisions to November and December totalled an inconsequential -3k.
Inventories of new homes rose to 479kin January, and median sales prices are
down some 15% from a year ago. These disappointing sales, supply, and price
data underscored the fact that we have not yet seen a bottom in the housing
market contraction.

Fed Chairman Bernanke presented his semi-annual testimony before House
Financial Services Committee. As he did on February 14 in testimony before the
Senate Banking Committee, Bernanke emphasized that "downside risks to growth
remain" and that the FOMC "will act in a timely manner as needed to support
growth..." In fact, on these points, the Chairman's wording was identical in
both testimonies. Bernanke again made it clear that the FOMC is prepared to
ease more if economic conditions deteriorate or if credit conditions tighten
further. Since we have been seeing further softening in economic activity, we
expect that the FOMC will cut the funds rate by another 50bp to 2.50% at the
March 18 policy meeting.

Growth clearly is the more worrisome variable on the Fed's radar screen than
inflation right now, but Bernanke's text today also suggested that he has
become mildly more concerned over the past couple of weeks about inflation. In
a change from his February 14 text, Bernanke warned today that "upside risks
to the inflation projection are also present..." Moreover, he said the FOMC
sees "slightly greater upside risks to the projections of both overall and
core inflation than we saw last month."

Economic Outlook


Initial unemployment claims for the week ended February 23 will be released on
Thursday at 8:30 (Consensus 350k). Claims in the previous were 349k, in line
with the consensus forecast. The four-week average for claims climbed to 361k,
the highest level since early October 2005 (in the aftermath of Hurricane
Katrina). A claims figure in line with the consensus forecast would lower the
four-week average to about 354k.